Many homeowners who need to move elect to sell their current home so they can have sufficient cash to purchase their next digs. Still, though, some might wonder: Should I sell or lease out my property? It’s a good question.
Move-up buyers: Put up for sale or lease your personal first property?
Owning rental property, in the end, generates predictable, long-term income. But make no mistake, backing into a landlord role comes with some hefty responsibilities – and no small amount of headaches.Here are a few questions to ask yourself to enable you to determine which road is correct for you.
Can you afford to own two homes?
“Financial wherewithal should be the No. 1 component as you weigh whether to hold on to the house,” says John Lazenby, 2016 president of the Orlando Regional Realtor® Association. Here’s what this means:
First, consider whether you will need two mortgages, one for the new home that you are (presumably) buying and one for the potential rental. If you have owned the home for enough time, you may have enough equity that you can pay off the balance and be free and clear. If not, it is advisable to speak with a mortgage adviser to ensure you will qualify for a mortgage on both the rental and the home you’ll be residing in.
Do the math on the return on investment of a rental. Look into local rental rates and see if there is a viable tenant stream, says Koki Adasi, team leader and founder of Koki & Associates at Long & Foster in Washington, D.C. If you are depending on the rental income to cover the mortgage on your new home, you’ll need to be in a position to charge enough to cover that and then some. After all, a rental comes with its own expenses-like maintenance, repairs, and, if you opt for a property management.
There could also be times the house sits empty between tenants.
“If the total monthly amount that you need supersedes rental market value, you may end up taking a monthly loss,” Lazenby says.
Also take into account potential tax benefits, advises Adasi. “Check into what costs you can write off, such as mortgage interest, property tax, operating expenses, depreciation and repairs,” he says. In the majority of states these expenses are tax write- offs; in addition, you could possibly deduct fees associated with running the rental, including property management, attorneys and cleaning services.
Will your old property appreciate?
Market conditions should weigh heavily in your decision as well.
“If you purchased the home at a good price and its value is rising steadily, you may want to hang on to it and accept any potential monthly loss in exchange for keeping your investment,” Lazenby says. You also may choose to keep the home if you have recently purchased it and it has not really increased enough in value to pay for costs associated with selling, such as closing costs, transfer taxes as well as other fees, says Adasi.
Look into comparable values in the neighborhood to gauge the long- term outlook. See whether trends are pointing toward it being an up-and-coming locale or one on the decline. Although it’s impossible to predict the future, those types of evaluations can help you to determine if the house is likely to rise or fall in market value.
And, take into account the “opportunity cost.” Evaluate whether you would potentially make more investing those funds elsewhere, for instance in the stock market or other retirement vehicle.
Can you effectively oversee the rental?
Being a landlord isn’t for everyone, points out Lazenby. “Ask yourself if you will be able to tolerate the stress that comes with being responsible for the home you’re living in, as well as a rental, particularly if it is long-distance.”
And before you become a landlord, you need to conduct your due diligence: A decent amount of upfront research is needed on the licensing and other laws that have to do with rentals in your area, county and state.
Will you ever want to go back to your home, sweet home?
For anyone who is relocating, either for work or personal reasons, consider the possibility that you might return to the area at some point to be near friends or family, suggests Lazenby. If the home offer all you wanted as well as the financial factors lineup, you might lease it out so that you one day have the option to return.